This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Hewlett Packard Enterprise Company’s (NYSE:HPE) P/E ratio and reflect on what it tells us about the company’s share price. Hewlett Packard Enterprise has a P/E ratio of 34.55, based on the last twelve months. That means that at current prices, buyers pay $34.55 for every $1 in trailing yearly profits.
How Do I Calculate Hewlett Packard Enterprise’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Hewlett Packard Enterprise:
P/E of 34.55 = $16.49 ÷ $0.48 (Based on the trailing twelve months to January 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Hewlett Packard Enterprise’s earnings per share fell by 53% in the last twelve months. And it has shrunk its earnings per share by 16% per year over the last five years. This growth rate might warrant a below average P/E ratio.
Does Hewlett Packard Enterprise Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (19.3) for companies in the tech industry is lower than Hewlett Packard Enterprise’s P/E.
Its relatively high P/E ratio indicates that Hewlett Packard Enterprise shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Hewlett Packard Enterprise’s Balance Sheet
Hewlett Packard Enterprise’s net debt equates to 39% of its market capitalization. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Hewlett Packard Enterprise’s P/E Ratio
Hewlett Packard Enterprise trades on a P/E ratio of 34.6, which is above the US market average of 18.2. With some debt but no EPS growth last year, the market has high expectations of future profits.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Hewlett Packard Enterprise. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.